Hey Scott,

Here is my re-re-re-rebuttal... First, I hope your wife is okay and makes a speedy recovery.

It seems that you have a crystal ball of some sort.  Since you indicate that my prognostications about the future under the Fair Tax are "incorrect assumptions."  I don't think can accurately say that those are incorrect until the Fair Tax passes and we see the result, which of course will never happen.  It won't happen for that very reason - nobody knows what would happen, but the fear of the consequences are logical.

#1:  You correctly point out that much of the spending is discretional.  Our economy relies on discretionary spending and if you increase the taxes on discretionary spending people will spend less on those items.   Even with the "pre-bates," if a person can avoid paying higher taxes they will most likely choose to do so.  We are seeing now what happens when discretionary spending slows down - it would logically be worse under the Fair Tax.

#2:  You point to the sales taxes in Texas and Florida as proof that a national sales tax would not lead to a black market.  But, the maximum tax in Florida is only 7.5% and in Texas its is 8.25%.  That is a far cry from the 30% the Fair Tax would impose.  A modest sales tax can, and does, work in many states.  However, the 30% rate under the Fair Tax would create a huge profit incentive for black markets.  As I already pointed out, look what happened when the government started taxing cigarettes - a huge black market developed. 

You also pointed to the VAT in Denmark as an example.  Our of curiosity, I looked it up and Denmark is among the nations with the highest tax in the world!  They do have a VAT tax (which is not quite the same as the Fair Tax) AND they have a progressive personal income tax (with rates as high as 59%).  That is another point I made - if we tried to implement the Fair Tax, we would have both a national sales tax and an income tax.  Furthermore, the VAT rate in Denmark is only 10%... much less than the Fair Tax proposes.

#3:  You seem to believe that social factors, like ego and social status, will still drive people to buy luxury items despite the 30% tax added.  We will just have to disagree on that.  Sure, some will; the filthy rich will always want their toys and some of them may even want them new.  Personally, I would be very happy with a used Mercedes or Jaguar and avoid paying a 30% premium.  I think most people would gravitate to used items when there is a huge tax on the new ones.

I agree that there are various reasons why the U.S. automakers are in trouble.  My point is only that that adding a 30% tax to new cars would exacerbate the problem.  This is exactly why the Tax Code is used to encourage some activities and discourage others - because it works.  If you raise taxes on something, people will buy less of it - if you exempt taxes on certain purchases, people buy more.

#4:  Any tax code, whether a progressive income tax or a national sales tax, will influence behavior.  The Fair Tax would do it with an axe, as opposed to a scalpel.  The Fair Tax encourages savings and punishes spending.  That would not help our economy which is dependent on consumer spending.  I do think we need to encourage more people to save, but the Fair Tax goes too far in that regard.

#5:  You still don't seem to understand the difference between progressive taxation and regressive taxation.  You said:

 I call our current system regressive because it punishes achievement and rewards poverty. What’s so progressive about a system that demands that you pay tax at a higher rate than me because you worked your tail off and made more money than I did?

A system that "demands that you pay a tax at a higher rate... because... [you] made more money" is the definition of a progressive tax!  If you believe that lower income people should pay more, then you are in favor of a regressive tax.  You're position that "if we started taxing poverty, there would be less of an incentive to be poor" is ridiculous.  You can't make someone less poor by taking more of their money.  Again, that is just simple logic.  The harsh reality is that the poor can't afford to pay more taxes - you can't get blood from a stone.

#7:  You are right, the tax under the Fair Tax plan is 23%, but it actually works out to be a 30% tax... here is how:

The Fair Tax is a whole different game. Instead of taxing income, this tax would hit consumption. Its proponents want to substitute what's often described as a flat 23% national sales tax on nearly all goods and services. But that 23% figure is a mirage. You'd actually pay 30% at the cash register. 

Think of it as a tax on your buying power. Fair Tax proponents say income taxes now make up about 23% of the cost of goods sold. Take away that tax and the cost of a $100 good, they say, would drop to $77. The Fair Tax would collect that $23 discount as a straight sales tax, which works out to 30% added to the price of goods and services. State and city taxes could be added on top of that.

I agree that people would have more disposable income if they actually received their entire paychecks and they got a $6,000 pre-bate.  However, since most middle income families spend all of their income - they save virtually nothing now - they will pay an effective rate of 30%, less the $6,000 pre-bate.  Because they will be taxed at 30% when they spend their pre-bate, it is really only worth $4,200.  I think most families are better off with a graduated tax rate that starts at only 10%.

#8:  With a Roth IRA you pay the sales tax when you invest the money - and it is tax free when you draw it out.  Thus, if you invest $100,000 over the course of your working-life, you may pay as much as $35,000 in taxes on that money as you contribute to your Roth IRA.  If that money grows to $200,000, you pay no income tax on the other $100,000.  Under the Fair Tax, those with Roth IRAs would have paid their $35,000 in tax and they would pay an additional $60,000 in "Fair Tax" when they spend it in retirement.  Thus, the Fair Tax punishes those that saved wisely for their retirement... seems like poor public policy to me.

#9:  Now who is making assumptions??  You assume that housing prices will drop because you are eliminating the "embedded" taxes in the cost of a home.  However, you fail to realize that the housing market has been around a while and those costs are already in there.  Are you suggesting that sellers will drop the price of their homes just because the Fair Tax is implemented??  I don't think so.  If you were right, the housing market would take an instant hit as soon as the Fair Tax was passed - I'm sure there are millions of homeowners that would not appreciate that very much - I'm one of them.

You seem to want to have this both ways.  You insist that the Fair Tax would provide a stable base because people are going to spend the same regardless of the new national sales tax (out of ego, or social status)... then you say "...they can determine how much tax they pay based on the choices they make."  If people can choose, they are always going to choose to pay less in taxes.    Thus, your arguments are inconsistent.  That seems to be the major flaw in your analysis.

Best,
Robert A. Franco
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